Landmark holiday pay case increases costs for employers
Author: Matthew Kilgannon
As has been highlighted in the press, the Employment Appeal Tribunal (“EAT”) has this week delivered a decision in the cases of Bear Scotland Ltd v Fulton (and other co-joined appeals) that could have far reaching implications for employers.
When paying holiday pay, employers must now take into account overtime payments and other allowances. Further, employees may be entitled to claim any underpayments of holiday pay although, reassuringly for employers, the judgment greatly restricts the scope for backdated claims.
Under the Working Time Regulations (“WTR”), a worker is entitled to be paid for any period of annual leave at the rate of a “week’s pay”. These cases focused on what should be taken into account when calculating a “week’s pay”.
In the cases, the first issue for the EAT to decide was whether payments of overtime ought to be included when calculating a week’s pay for holiday pay purposes. There was a distinction drawn between “non guaranteed overtime” (where a worker may be required to undertake overtime but there is no obligation on the employer to provide it) and “guaranteed overtime”, which is where an employer is obliged to provide overtime and to pay for overtime even if there is no work available. Before these cases, the law provided guaranteed overtime should be taken into account when determining a week’s pay, and that position hasn’t changed. In these cases the EAT had to decide what should happen with non-guaranteed overtime.
In determining the issue, the EAT referred to a number of cases where guidance had been sought from the Court of Justice of the European Union (“CJEU”). The CJEU’s general approach has been that when “…considering paid annual leave…” “…workers must receive their normal remuneration for that period of rest.”
The CJEU has held that it is for the National Courts to assess the “intrinsic link between the various components which make up the total remuneration of the worker and the performance of the tasks which he is required to carry out under his Contract of Employment”.
That CJEU case quoted above involved airline pilots and, here, the CJEU concluded that remuneration related to the personal and professional status of an airline pilot had to be maintained during paid annual leave as it amounted to “normal remuneration”.
In concluding this issue, the EAT Judge found that non-guaranteed overtime should be included when calculating holiday pay. Putting it nice and simply, the Judge commented: “…”normal pay” is that which is normally received”. He appeared to find it a relatively easy conclusion to reach and one that he does not think has prospects of being successfully appealed.
A separate issue the Judge had to resolve only applied in two of the cases that had been joined together. Here, he had to decide if certain other allowances payable to employees should also be taken into account for holiday pay purposes.
The first was a “radius allowance” that was paid to those whose commute was more than eight miles. The second was a “travelling time payment” paid for time spent travelling to work.
Again, the Judge found that these allowances were not ancillary to their work or employment (unlike the cost of a train ticket or bus fare) and that they were normally paid to the employees. They were, therefore, directly linked to their work and should also be taken into account when calculating holiday pay.
Therefore, the current position is that those payments that are normally paid should be taken into account for holiday pay purposes. It would appear that “normal remuneration” will need to include supplements, commission, overtime, shift allowances and any other comparable payments.
The law in calculating a week’s pay where a worker’s pay fluctuates is notoriously complex, and these cases have added an extra layer of complexity. The approach was always to average a worker’s pay over the preceding 12 weeks to find the average, however, even that rule is now called into question as being the correct application.
Can employees bring backdated holiday pay claims?
The EAT also examined the scope for backdated holiday pay claims. Under the Employment Rights Act 1996 workers can claim holiday pay as an unlawful deduction from wages. Where there is a “series” of deductions the arrears could potentially go back years provided that the claim is brought within 3 months of the last “deduction” in the series.
In order to provide certainty and to ensure that claims are brought promptly, the Judge concluded that where claims are brought for a series of deductions there must not be more than a 3 month gap between any of the deductions. If there is then any of the earlier deductions (i.e. those prior to the break of more than 3 months) will be out of time and the claim limited to the more recent deductions.
For example, if an employee has been underpaid holiday pay (e.g. because overtime payments were excluded), and has taken, at least, one day’s holiday every month for the past two years, s/he could claim for the underpayment and go back the entire two year period. In contrast, if an employee took two weeks holiday in April, and two weeks in August and both were underpaid, then because more than three months has elapsed between April and August, only the deduction in August can be claimed (provided the ACAS early conciliation process is completed, the Tribunal fee is paid and the claim is issued within three months of the deduction in August (subject to any extension of time for early conciliation)).
Therefore, while looking forward, the Judge has concluded that employers must take into account overtime (and other allowances) when calculating holiday pay. Looking back, if there has been more than a three month gap in any alleged series of deductions, the value of those historical claims will be limited.
The cases only focused on the WTR. This implements the EU Working Time Directive that requires member states to offer four weeks paid leave (20 days for workers working a 5 day per week).
Under the WTR, the minimum annual holiday is more; 5.6 weeks (28 days). As these issues only relate to the European Directive, it is thought that the EAT’s decision only affects the four weeks paid leave under the Directive, not the entire 5.6 weeks leave under the WTR.
However, such an approach has many issues and difficulties. How will employers and workers know whether the leave taken is the four week entitlement under the Directive or the extra 1.6 weeks available under the WTR? Is it right to have a two tier holiday pay system?
What does this mean for you?
Essentially, if, in addition to basic salary, you make regular payments to your staff that are intrinsically linked to the work you require them to undertake, such as overtime, commission, allowances etc then these payments ought to be included when calculating their holiday pay. In this situation, to continue paying holiday pay on basic salary only will be in breach of the current law entitling your employees/workers to claim against you.
While that is the current position, it is thought that appeals are likely, so the position may change. Appeals could take many years to conclude, and any worker bringing a claim may find their case “stayed” until these issues have been resolved by higher courts.
While this may represent a significant cost implication, there is also the practical issue of having more complex holiday pay calculations.
There are likely to be some practical solutions available to you, including:
- options you may have around how overtime is offered and paid. However, caution is needed if this is likely to involve a detrimental change to terms and conditions;
- your right to refuse a request for holiday and/or to dictate when staff take their holiday. This means you could impose fairly draconian sanctions on your staff, but avoid inflated holiday pay if the overtime/commission payments are cyclical. For example, if the period leading up to Christmas is busy and results in you paying overtime or commission, you could refuse holiday requests between January and March so as to avoid inflated pay. This would totally defeat the point of the WTR, as was raised by one of the employers pursuing the appeal;
- whether you ensure every worker has, at least, a three month gap at some point in their holiday throughout the year, so as to minimise the risk of a claim for historic holiday pay; and
- Whether you need to take any action. In view of the likelihood of an appeal, it might be sensible to do nothing, other than to create a fund in the event that there are claims. This assumes the ultimate position remains unchanged (noting, of course, that if this decision remains, the worker must not have more than a three month break in his/her holiday in order to claim for historic holiday pay).
The implications of this decision will be different for every business so specific legal advice should be sought, especially if it involves a change or review of your contracts of employment. This article is for information only and is not legal advice.
Should you have any queries or concerns, please contact either David Seals at firstname.lastname@example.org or on 01306 502 218 or Matthew Kilgannon at email@example.com or on 01483 411 517.